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The Pavlovian Response of Term Rates to Fed Announcements


  • Oscar Jorda
  • Selva Demiralp

    (Department of Economics, University of California Davis)


The traditional view of the monetary transmission mechanism rests on the premise that the Federal Reserve (Fed) controls the level of the Federal funds rate via open market operations and the liquidity effect. By contrast, this paper argues that the Fed also manipulates the Federal funds rate via public disclosures of the new level of the Federal funds rate target and the ""announcement effect.'''' We define the announcement effect as the portion of interest rate movements associated with public statements on interest rate targets that do not require conventional open market operations for their support. This paper provides evidence on how the Fed uses the liquidity effect in conjunction with the announcement effect to execute monetary policy. In addition, it investigates the implications of the announcement effect on term structure behavior and the rational expectations hypothesis.

Suggested Citation

  • Oscar Jorda & Selva Demiralp, 2003. "The Pavlovian Response of Term Rates to Fed Announcements," Working Papers 996, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:99-6

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    References listed on IDEAS

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Kevin D. Hoover & Òscar Jordà, 2001. "Measuring systematic monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 113-144.
    2. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Papers 0229, Banco de España;Working Papers Homepage.
    3. Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-370.
    4. Schabert, Andreas, 2005. "Identifying monetary policy shocks with changes in open market operations," European Economic Review, Elsevier, vol. 49(3), pages 561-577, April.
    5. Selva Demiralp, 2001. "Monetary policy in a changing world: rising role of expectations and the anticipation effect," Finance and Economics Discussion Series 2001-55, Board of Governors of the Federal Reserve System (U.S.).
    6. Sylwia Nowak, 2008. "How Do Public Announcements Affect The Frequency Of Trading In U.S. Airline Stocks?," CAMA Working Papers 2008-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Paul R. Bergin & Oscar Jorda, "undated". "Monetary Policy Coordination: A New Empirical Approach," Department of Economics 01-02, California Davis - Department of Economics.
    8. Demiralp, Selva & Farley, Dennis, 2005. "Declining required reserves, funds rate volatility, and open market operations," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1131-1152, May.
    9. Ekor, Maxwell & Adeniyi, Oluwatosin & Saka, Jimoh, 2013. "Central Bank Communication and Monetary Policy Effectiveness: Empirical Evidence from Nigeria," MPRA Paper 82630, University Library of Munich, Germany.

    More about this item


    Liquidity Effect; Announcement Effect; Term Structure; Marked Point Process;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling


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